Donald Trump’s multitasking skills are on graphic display as his White House wages two wars simultaneously – one abroad, one at home.
The US president’s big gamble in bombing Iran is upending global markets in unpredictable ways. Though Trump claimed there’s a ceasefire between Iran and Israel, he’s already lashing out angrily to early breaches in the deal by both Tehran and Jerusalem.
Yet his assault against Federal Reserve Chair Jerome Powell is making its own waves in Asian markets. It’s not just Trump, of course, but his top lieutenants gunning for a Fed chief failing to bow to demands for lower interest rates.
Vice President JD Vance says, “the refusal by the Fed to cut rates is monetary malpractice.” Commerce Secretary Howard Lutnick says, “our Federal Reserve Chair is obviously afraid of his own shadow. These high interest rates make no sense. Enough is enough!!”
Appearing on CNBC, White House economic adviser Kevin Hassett complained: “I think there’s no reason at all for the Fed not to cut rates right now. And I would guess that if they see one more month of data, they’re going to really have to concede that they’ve got the rate way too high.”
Trump, meanwhile, lashed out at Powell anew on Tuesday (June 24). He posted on social media that: “‘Too Late’ Jerome Powell, of the Fed, will be in Congress today in order to explain, among other things, why he is refusing to lower the rate. Europe has had 10 cuts, we have had ZERO. No inflation, great economy — we should be at least two to three points lower. Would save the USA 800 billion dollars per year, plus. What a difference this would make.”
Trump World’s assault on the globe’s most powerful central bank is something markets have never seen before. The Fed isn’t just the most respected US institution abroad. It’s also a key protector of nearly US$3 trillion of Asian savings parked in US Treasury securities.
As Trump threatens to reduce the Fed’s independence, Asia is very much on the frontlines. Its export-driven economies would be hit hard by a surge in US yields or by a sharp drop in the dollar as investors cut their losses and flee.
Analysts at UBS speak for many when they warn the dollar is now “unattractive”, with further declines expected as the US economy loses momentum.
In congressional testimony this week, Powell did his best to pretend all’s well between Trump World and the Fed.
“For the time being, we are well-positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,” Powell said.
So far, the worst fears about the tariffs fueling an inflationary surge haven’t come to fruition. “The effects on inflation,” he said, “could be short-lived, reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent.”
Powell largely glossed over Trump’s torrent of attacks on the Fed’s autonomy, singling him out as a “numbskull.” The Fed, as Powell made clear, has yet to decide which is the bigger risk — inflation or a sharp slowdown in growth.
As Atlanta Federal Reserve President Raphael Bostic told Reuters, “I would see the last quarter.. is sort of when I would expect we would know enough to move.”
Yet, notes Andrew Brenner at NatAlliance Securities, Powell was unable to “convince markets of hawkishness. The markets are telling Powell that he will be lowering rates much more quickly than he portrayed today. We just don’t know about July. We would need a weak payroll report.”
Investors are paying close attention to events in the Middle East, where Israel and the US are clashing with Iran. Though Trump claims there’s a ceasefire, he’s already calling out Tehran and Jerusalem for early breaches of the deal.
In the meantime, Trump’s war with the Fed is tantalizing markets. For now, many investors are cheered that Powell is proceeding carefully so as not to provoke Trump.
“Markets are finally breathing again,” observes Haris Khurshid, chief investment officer at Karobaar Capital. “The easing in Middle East tensions, paired with Powell striking a more flexible tone, is giving equities room to run and volatility a much-needed pause.”
Analysts at Evercore ISI note that Powell’s testimony “continues to point to September as the next decision point and, on our read, is consistent with a September cut as a reasonable central case, but very far from guaranteed.”
There’s clearly a range of opinions at the Fed about the need for rate cuts. Yet two Trump appointees seem ready to hit the monetary accelerator.
Fed Governor Michelle Bowman recently said that “should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labor market.”
Also, Fed Governor Christopher Waller said on CNBC that any tariff-fueled inflation is likely to be temporary and tentatively endorsed cutting rates next month.
Yet wildcards abound amid Trump’s attacks on Iranian nuclear facilities and his tariffs. Apollo Global Management economist Torsten Slok can’t help but wonder if there’s some method to Trump’s madness.
In a note titled “Has Trump Outsmarted Everyone on Tariffs?,” Slok notes that “maybe the strategy is to maintain 30% tariffs on China and 10% tariffs on all other countries and then give all countries 12 months to lower nontariff barriers and open up their economies to trade.”
Slok says that Trump, by extending the deadline for tariffs by one year, would give other countries and US companies ample time to adjust to a “new world with permanently higher tariffs.” This approach, he says, would reduce uncertainty, giving a boost to employment, business planning and financial markets.
“This would seem like a victory for the world and yet would produce $400 billion of annual revenue for US taxpayers,” Slok adds. “Trade partners will be happy with only 10% tariffs and US tax revenue will go up. Maybe the administration has outsmarted all of us.”
In the meantime, though, it seems clear that the dollar’s days of being collateral damage amid Trump’s one-man arms race are far from over.
The Japanese yen is now on the cusp of the 140 level to the dollar, as the US currency hits three-year lows versus a basket of top currencies. The worry in Tokyo is that a continued drop would trigger intense yen-selling and the unwinding of the so-called “yen-carry trade.”
On another, a plunging dollar would trigger an epic risk-off trade.
Paul Tudor Jones, who founded the $16 billion macro hedge fund Tudor Investment Corp, thinks a sharp dollar drop lies ahead as the Fed slashes interest rates. He thinks the dollar could be 10% lower within the next 12 months.
“You know that we are going to cut short-term rates dramatically in the next year,” Jones tells Bloomberg. “And you know that the dollar will probably be lower because of it. A lot lower because of it.”
Jones thinks Trump will replace Powell with an “uber dovish” leader who will bow to demands for lower rates. There’s speculation that Trump might tap current Treasury Secretary Scott Bessent to lead the Fed.
Trump managing to name a loyal political appointee as Fed chief could backfire in Asia, the region that holds the largest stockpiles of US Treasury debt. Already, “there’s clearly solid dollar selling,” observes strategist Kit Juckes at Societe Generale.
Case in point: what becomes of the target Trump put on Fed Chair Powell’s back. Unhappy that Powell warned US tariffs might cause stagnation, Trump said the Fed leader’s “termination cannot come fast enough.”
Trump’s threats to fire Powell sent shockwaves through world markets. Though US leaders in the past jawboned Fed policymakers at times to lower rates, none had ever publicly demanded subservience. A simultaneous plunge in stocks and bond prices had Trump toning down his rhetoric.
Yet economist Krishna Guha at Evercore ISI calls the episode “self-defeating.” By publicly undermining Powell, Guha says, Trump “risks putting upward pressure on inflation expectations, making it harder for the Fed to cut rates.”
Even so, few buy Trump’s insistence that he has “no intention of firing” Powell. In the next breath, after all, Trump says he wants the Powell Fed to a “little more active” in easing policy.
As the Fed ignores Trump’s pleas, expect his war with the central bank to intensify in real-time.
Follow William Pesek on X at @WilliamPesek
